Question

(Accounting for Research and Development Costs)

Czeslaw Corporation's research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from the company's controller, Jeff Reid.

Reid recognizes that corporate profits have been down lately and is hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirements of the authoritative literature. He knows that if they hire an outside firm that does the work and obtains a patent for the process, Czeslaw Corporation can purchase the patent from the outside firm and record the expenditure as an asset. Reid knows that the company's own R&D department is first-rate, and he is confident they can do the work well.

Instructions

Answer the following questions.

(a)  

Who are the stakeholders in this situation?

(b)  

What are the ethical issues involved?

(c)  

What should Reid do?

Answer 1

a) Who are the stakeholders in this situation?

Answer: The investors, creditors and employees are the stakeholders in the current situation because investors and creditors are concerned about the dividends, profits, and company's cash flows. Czeslaw Corporation's employees are concerned about the job security.

(b) What are the ethical issues involved?

The ethical issue involved is taking the company's R&D departments idea and providing it to an outside firm to patent. It will be unethical because the outside company didn't develop the idea. Moreover, there is a possibility that the outside company might not sell the patent back after it is developed. As a result could pull out of the contract and sell to a competitor. It would have an adverse affect on the company even though it would be less expensive. Thus ethical issue involved related to the long-term versus short-term profit, employees loyalty, job security, and efficient operations.

(c) What should Reid do?

Reid should do what is best for the Czeslaw Corporation in the long-run. Reid primarily concern should be that the project to be done efficiently at the lowest cost. The allocation of reorganization of expenses in the income statement should not be driving factor in decision making. Reid need to do proper analysis that impact employees’ moral if they don’t use corporation’s research and development department. Reid may propose the other idea of hiring the outside company to incur the development expense of the patent. After the consultation Reid may allocate the funds based on the Board and CEO's decision